Organizations formed to support particular political candidates often achieve favorable tax status as political action committees (“PACs”) and those formed to focus on particular causes can be formed as charitable organizations. Both are exempt from most income taxes and contributions to each are specifically exempt or deductible with respect to the federal gift tax.
Recently, so-called social welfare organizations or civic associations, also known as Section 501(c)(4) organizations, have been formed to support political causes. While such 501(c)(4) organizations generally are exempt from income taxes as well, contributions made to them by donors are not specifically exempted from the gift tax. Historically, donors have not been concerned about this discrepancy. It now appears, however, the Internal Revenue Service now may be attempting to impose gift tax liability on such contributions.
Media reports indicated that contributions to Code Section 501(c)(4) organizations may have been made to avoid campaign finance regulations and public disclosure of contributions. While the tax form filed by such organizations each year includes the names of contributors who gave more than $5,000 and the aggregate amount of such contributions, this information is not publicly available. However, the IRS is free to use the information for related enforcement purposes. In a recent front page articleThe New York Times reported the IRS sent letters to five unidentified donors informing them that their contributions to Section 501(c)(4) organizations may be subject to gift tax.
This development is consistent with the 2011 Work Plan of the Exempt Organizations Division of the IRS, which indicated that the Division planned to increase its focus on Section 501(c)(4) organizations. The donor letters suggest IRS personnel who enforce the estate and gift tax will also pay attention to such groups in the context of the gift tax.
There are ways to structure contributions to such organizations to reduce or eliminate gift tax liability. Donors and those managing Section 501(c)(4) organizations would be well advised to seek knowledgeable counsel. Members of the Tax-Exempt and Government Relations Teams at Baker & Hostetler will continue to monitor developments in this area and are available to confer with clients and potential clients about these important issues.